| July 2007 issue: CLLA Breakfast with Dave Barry
Your Name Here! The Bankruptcy Section is looking for volunteers to write a Case Analysis for an upcoming addition. The Case Analysis is typically based on Court of Appeals or Supreme Court decisions, although you can use your discretion to discuss relevant BAP, District Court and Bankruptcy Court decisions -- especially those interpreting BAPCPA's amendments to the Code. If you are interested or would like to learn more, please send an email to the Managing Editor. You can view the archive here. Your subscription You have been subscribed to this list as part of your membership in the Bankruptcy Section of the Commercial Law League of America. CLLA 70 East Lake Street, Suite 630 Phone: 312-781-2000 Newsletter design by: |
Nomination deadline! KING AWARD FOR EXCELLENCE. Given to recognize that lawyer, judge, teacher or legislator who exemplifies the best in scholarship, advocacy, judicial administration or legislative activities in the field of bankruptcy. The recipient will exemplify the standards set by Professor King during a life-time of devotion to the practice and practitioners of bankruptcy. She or he will have made a lasting contribution to the improvement of commerce and to the fair and ethical treatment of debtors, creditors and the public at large. The award will recognize a career, not an event. The award will be presented at the Commercial Law League’s Annual Breakfast held at the 2007 National Conference of Bankruptcy Judges October 11, 2007 in Orlando FL. Established in 2001, this award has been presented to Professor Lawrence King (in memoriam, 2001), Professor Elizabeth Warren (2002), The Honorable Joe Lee (2003), Professor David Epstein (2004), The Honorable A. Thomas Small (2005) and George Treister (2006). Nominations are due August 15, 2007. Click here for a nomination form. Sua SponteDeborah K. Ebner Normally, in the face of our Strategic Planning Conference I would not write about case law in the monthly Sua Sponte. However, as I dash out to catch my plane, both case law and strategic planning come to mind. This convergence was prompted by a phone call from Bill Schorling. Bill, as most of you know, is our Amicus Chair. He called to discuss whether or not our Section should weigh in on the Debt Relief Agency issue initiated by BAPCPA. That issue was recently addressed by the United States District Court for the District of Minnesota in the matter of Milavetz, Gallop & Milavetz v. US. Case Law UpdatePaula Lucas Failure to disclose potential conflicts not violation of Federal Rule. 2014. Order reversing bankruptcy court's order awarding an adjusted fee for the investment banking services of defendant, and affirming bankruptcy court's finding that defendant's failure to disclose potential conflicts did not violate Federal Rule of Bankruptcy Procedure 2014 or harm the bankruptcy estate, is reversed in part where the district court erred by concluding the bankruptcy court improperly considered a reasonable lodestar in calculating defendant's attorney fees, and to the extent the district court found the bankruptcy court had considered whether defendant's conduct violated Rule 2014. In re. Citation Corporation 2007 U.S. App. LEXIS 17920 (11th Cir. July 26, 2007). Case AnalysisAbraham E Brustein First a Drought; Now a Flood Introduction In the twenty months following the enactment of BAPCPA, there were no appellate decisions addressing the rights of a creditor protected by the hanging paragraph of Section 1325 (a) to retain an allowed unsecured deficiency claim when a Chapter 13 debtor returns property within the purview of the hanging paragraph. Recently, the Seventh Circuit became the first Court of Appeals to address how the hanging paragraph affects a Chapter 13 debtor who elects to return a motor vehicle to the purchase money lender. The next business day, the Bankruptcy Appellate Panel for the Tenth Circuit addressed the identical issue and reached a contrary result. NCBJ Sponsorship OpportunitiesThe Commercial Law League of America and its bankruptcy section have sponsorship opportunities available at the National Conference of Bankruptcy Judges ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Sua SponteBy Deborah K. Ebner Normally, in the face of our Strategic Planning Conference I would not write about case law in the monthly Sua Sponte. However, as I dash out to catch my plane, both case law and strategic planning come to mind. This convergence was prompted by a phone call from Bill Schorling. Bill, as most of you know, is our Amicus Chair. He called to discuss whether or not our Section should weigh in on the Debt Relief Agency issue initiated by BAPCPA. That issue was recently addressed by the United States District Court for the District of Minnesota in the matter of Milavetz, Gallop & Milavetz v. US. Milavetz, Gallop & Milavetz are attorneys in Minnesota who represent consumer debtors in bankruptcy cases in that State. The attorneys sought an Order declaring that 11 USC Sections 12A, 526 & 528 of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) violate the 1st amendment of the United States Constitution. For reasons stated in the Court's April 19, 2007, the Court held that BAPCPA's Title 11 USC 526(a)(4) and Section 528(a)(4) and (b)(2) are unconstitutional as applied to attorneys in the District of Minnesota, and attorneys in the State of Minnesota are excluded from the term "Debt Relief Agency" and are therefore relieved of any duties relating to Debt Relief Agencies. The United States has squared off against the Minnesota lawyers and has filed an appeal. The government bases its appeal upon the "plain meaning of the statute" interpretations raised by the Courts in Hersh v. U.S., 377 BR 19 (ND Tx 2006) and Olson v. Gonzales, 350 BR 906 (D Oregon 2006). As the bankruptcy bar knows BAPCPA includes congressional enactment of attorney standards for the purpose of "strengthening professionalism standards for attorneys who assist consumer debtors" in the bankruptcy process. These standards are largely captured at 11 USC sections 101(12A), 526 and 528. "Debt Relief Agency" is defined as "any person" who, for a fee "provides any bankruptcy assistance to an assisted person". Debt Relief Agencies are directed to adhere to the requirements of 11 USC 526 and 528, which, as drafted, create unanticipated stumbling blocks, which in turn create unexpected problems for consumer debtors. As Bill and I spoke, we both recognized that even though the Commercial Law League is an organization of commercial lawyers and business people, our Section is a leader in the bankruptcy industry and is relied upon to monitor the implementation of bankruptcy laws in our country. We agreed that since the "Debt Relief Agency" provisions, so largely impact the entire bankruptcy system, it is necessary and appropriate for our Amicus Committee to consider intervention. I realize that by the time this Sua Sponte is published, the Strategic Planning Meeting will be a memory. However, as I write, it has not yet taken place. As I head off to Orlando to weave the League's roadmap for the future, I remember Bill's phone call. I realize that our Section's work is vital to the bar, our courts, and those who rely upon our system of laws. Our Strategic Plan will certainly incorporate that which we already do and that which we can strive to do. Thank you Bill. Law Office of Deborah K. Ebner Case Law UpdateFailure to disclose potential conflicts not violation of Federal Rule. 2014. Order reversing bankruptcy court's order awarding an adjusted fee for the investment banking services of defendant, and affirming bankruptcy court's finding that defendant's failure to disclose potential conflicts did not violate Federal Rule of Bankruptcy Procedure 2014 or harm the bankruptcy estate, is reversed in part where the district court erred by concluding the bankruptcy court improperly considered a reasonable lodestar in calculating defendant's attorney fees, and to the extent the district court found the bankruptcy court had considered whether defendant's conduct violated Rule 2014. In re. Citation Corporation 2007 U.S. App. LEXIS 17920 (11th Cir. July 26, 2007). No obligation to seek court approval to bring equitable subordination claim. Order affirming order of the bankruptcy court denying appellant committee of unsecured creditors authorization to assert a claim of equitable subordination under Section 510(c) of the Bankruptcy Code is affirmed over claim that appellant is not obligated to seek the court's approval to bring its equitable subordination claim because In re STN Enters., 779 F.2d 901 (2d Cir. 1985), does not apply. In re. Applied Theory Corp. (2nd. Cir. July 10, 2007). Debtor seeks recovery of pre-filing transfers. In case involving a chapter 11 debtor seeking to recover certain transfers made before the company declared bankruptcy, order affirming bankruptcy court judgment in favor of defendants is reversed as: 1) plaintiff's fraudulent transfer claims were not barred by the statute of limitations; and 2) bankruptcy court's alternative holding on the merits is rejected where the court erred in its calculation of plaintiff's solvency and the "value" plaintiff received in return for the disputed transfer. In re. Advanced Telecomm. Network Inc. 2007 U.S. App. LEXIS 16188 (11th Cir. July 10, 2007). Court interprets 2005 amendment to Code. A bankruptcy court denial of a Chapter 13 plan that would allow debtors to surrender a vehicle to a creditor and pay nothing on account of the difference between the loan's balance and the collateral's market value is affirmed where the court interprets a 2005 amendment to the Bankruptcy Code as giving the creditor the right to an unsecured deficiency judgment after surrender of the collateral in a situation where the debt exceeds the current value of the collateral, unless the loan contract itself provides that the loan is without recourse against the borrower In. Re, Craig White 2007 U.S. App. LEXIS 16260 (7th Cir. July 5, 2007). 707(a) provisions trumped. Where sections of the Bankruptcy Code other than section 707(a) address types of conduct that are alleged to be grounds of dismissal for "cause" under section 707(a), those more-specific provisions trump the general "cause" standard and preclude dismissal under section 707(a) based upon such conduct. In re. Sherman 2007 U.S. App. LEXIS 15833 (9th Cir. July 5, 2007). Trustee settlement affirmed. District court's affirmance of the bankruptcy court's order finding plaintiff bound by its previous orders compelling and then approving the bankruptcy trustee’s settlement of a state court action brought against him by defendant is affirmed as the doctrine of res judicata precludes plaintiff from re-litigating the defenses waived in the settlement agreement and considered at the appropriate time by the bankruptcy court. Martin v. Pahiakos 2007 U.S. App. LEXIS 15825 (11th Cir. July 5, 2007). Bankruptcy Court applied an overly-strict legal standard for willfulness. Reversal of an order of the Bankruptcy Court, in which the Bankruptcy Court determined that defendant's federal income tax debt is dischargeable in bankruptcy and that he had not willfully attempted to evade or defeat a tax within the meaning of 11 U.S.C. section 523(a)(1)(C) is affirmed where the Bankruptcy Court applied an overly-strict legal standard for willfulness, and the undisputed facts demonstrate as a matter of law that defendant willfully attempted to evade or defeat his taxes. U.S. v. Jacobs (In re. Jacobs) 2007 U.S. App. LEXIS 15542 (11th Cir. June 29, 2007). Dismissal pursuant to 305(a). A bankruptcy court may, under appropriate circumstances, order a petitioning creditor to pay an alleged debtor’s attorney’s fees and costs when, upon finding that the interests of creditors and debtor would be better served, it dismisses a good faith involuntary petition pursuant to § 305(a). In re. Macke International Trade, Inc. (9th Cir. BAP, June 28, 2007). Click here for case. An attorney for a debtor in possession is a fiduciary of the bankruptcy estate. While counsel’s duty to the estate may not rise to the level of a policeman for the debtor’s post-petition conduct,57 an attorney for the debtor in possession has fiduciary obligations to the estate stemming from his fiduciary duties to the debtor in possession and his responsibilities as an officer of the court. A debtor in possession’s attorney bears a heightened duty of care to ensure the integrity of the bankruptcy process. A debtor in possession’s attorney must be proactive, i.e., prepared to render unsolicited legal advice regarding preventative or corrective action that may be necessary for the debtor in possession to properly discharge its fiduciary obligations. Counsel for the DIP is liable for sanctions for failing to act diligently to ensure that the DIP ’s principal took appropriate steps to safeguard funds that were supposed to be segregated from a free and clear sale. In. re. Count Liberty LLC (Bankr. C.D. Cal. June 27, 2007). Click here for case. Lien avoidance allowed. An order reversing a decision of the bankruptcy court that granted bankruptcy trustee's complaint for lien avoidance is reversed where a bankruptcy court correctly determined that the lien the trustee sought to avoid was not perfected as of the date the debtors filed for bankruptcy, and thus, the trustee should have been permitted to avoid it. Morris v. Hicks (In re. Hicks 2007 U.S. App. LEXIS 15114 (10th Cir. June 25, 2007) . Recovery of preferential transfers based upon party relationship. In bankruptcy proceedings in which the debtor filed a complaint against its creditor to avoid and recover preferential transfers from the creditor, a judgment rejecting defendant's defenses and motion for an adverse inference is vacated in part and remanded where the bankruptcy court erred in holding that the fact that the parties had a credit relationship precluded, as a matter of law, a finding that the debtor intended the transfers to be part of a contemporaneous exchange for new value. Denial of the debtor's request for prejudgment interest is also vacated and remanded where the district court failed to explain its reasons for the denial. In re. Hechinger Inv. Co. of Delaware, Inc. 2007 U.S. App. LEXIS 13155 (3rd. Cir. June 6, 2007). Paula Lucas Case Analysis: First a Drought; Now a FloodIntroduction In the twenty months following the enactment of BAPCPA, there were no appellate decisions addressing the rights of a creditor protected by the hanging paragraph of Section 1325 (a) to retain an allowed unsecured deficiency claim when a Chapter 13 debtor returns property within the purview of the hanging paragraph. Recently, the Seventh Circuit became the first Court of Appeals to address how the hanging paragraph affects a Chapter 13 debtor who elects to return a motor vehicle to the purchase money lender. The next business day, the Bankruptcy Appellate Panel for the Tenth Circuit addressed the identical issue and reached a contrary result. Summary On July 3, 2007, the Seventh Circuit issued its opinion in Matter of Wright, 2007 WL 1892502, holding that a Chapter 13 debtor who elects to return collateral to a purchase money lender protected by the hanging paragraph must provide the purchase money lender with an unsecured claim in the plan. On July 5, 2007, the Bankruptcy Appellate Panel of the Tenth Circuit, came to the opposite conclusion in In re Quick, 2007 WL 1941749 (10th Cir. BAP., 2007). Factual Background Section 306(b) of BAPCPA added the so called “hanging paragraph” to Section 1325(a) of the Bankruptcy Code. Specifically, it modifies Subsection (a)(5) by granting special protection to purchase money lenders (“Protected PMSI Lenders”); most notably lenders providing purchase money financing for motor vehicles acquired for personal use within 910 days (30 months) of the petition date. Section 1325 (a)(5)(C) provides that a Chapter 13 plan is confirmable with respect to an allowed secured claim if the debtor chooses to surrender the property to the holder of the claim. However, the hanging paragraph goes on to provide that Section 506 of the Code, the statutory provisions which authorizes the bifurcation of undersecured claims into an allowed secured claim and an allowed unsecured claim, shall not apply to claims held by Protected PMSI Lenders. This begs the question which was decided by the Wright and Quick courts. Namely, if Section 506 does not apply to claims protected by the hanging paragraph, is the Protected PMSI Lender entitled to an unsecured claim if the debtor chooses to surrender the property to the lender and the property has a value which is less than the face amount of the debt as of the petition date? Analysis Prior to BAPCPA’s enactment of the hanging paragraph, a Chapter 13 debtor could propose a plan which recognized Section 506(a’s) division of under secured loans into secured and unsecured portions. The debtor’s plan could provide for monthly payments having a present value equal to the market value of the property in providing for the secured claim. Typically, parties jousted over the value of the collateral and the interest rate to be paid on the secured claim using the guidelines set forth by the Supreme Court in Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997) and Till v. SCS Credit Corp., 542 U.S. 465 (2004). The unsecured portion of the claim could be treated as a general unsecured claim under the plan. The hanging paragraph mandates that Section 506 can no longer apply to the transactions with Protected PMSI Lenders by the hanging paragraph. Therefore, without Section 506 removed from the field by the hanging paragraph, bankruptcy courts have had to repeatedly grapple with the question of whether the plan must provide for both the secured component of the claim and the unsecured component of the claim which is held by the Protected PMSI Lender. Prior to Wright, no Court of Appeals had addressed the issue. However, numerous bankruptcy courts have had to opine on the issue. The debtor side of the argument is relatively simple. Section 506 (a) is the sole statutory basis for dividing an under separate secured claim into secured and unsecured components, each of which is an allowed claim. If Section 506 does not apply, the Protected PMSI Lender has a single, unitary claim. If the debtor elects to retain the vehicle, the claim is treated as secured to the entire balance due. If the debtor elects to surrender the vehicle, then no unsecured claim remains. In Wright, the Seventh Circuit rejected the debtor’s arguments, even though it recognized that the majority of bankruptcy courts to have decided the issue have adopted the position advocated by debtors. That is, the majority of bankruptcy courts have held the claim protected PMSI Lender is deemed fully satisfied upon surrender of the vehicle. The Seventh Circuit’s approach to resolving the issue is surprisingly simple. It harkens back to Butner v. United States, 440 U.S. 48 (1979), the Supreme Court decision which is based upon the proposition that property rights are defined or created by state law, not federal bankruptcy law. The bankruptcy statute adjusts the relations between debtors and creditors. It does not create property rights by implication. Working from this premise, the Wright court concludes that state contract law and Article 9 of the UCC both recognize the enforceability of a deficiency claim against a borrower after disposition of collateral. Simply put, this is the essence of the recourse lending. Outside of bankruptcy, a secured lender may enforce a deficiency claim against a debtor as part of its arsenal of remedies under state law. Section 506 modifies the secured lender’s remedies under non-bankruptcy law. By making Section 506 inapplicable to transactions with Protected MSI Lenders, the hanging paragraph returns the parties to the position they were in prior to petition date. Wright finds support for this conclusion in the fact that the Section of BAPCPA which enacts the hanging paragraph is titled, “Restoring the Foundation for Secured Credit”. Interestingly, Wright does not look at any other aspect of statutory construction. The National Association of Consumer Bankruptcy Attorneys, as amicus curiae, argued that the hanging paragraph has the affect of requiring that claims of Protected PMSI Lenders must be treated as wholly unsecured. Amicus urged the court to find that only Section 506 provides for an “allowed secured claim”. Therefore, if Section 506 does not apply, a Protected PMSI Lender cannot have a secured claim in a Chapter 13 case. The court rejected that contention by finding that Section 502 provides the basic guidelines for determining the allowance of claims. Pursuant to Section 502, unless the Code specifically provides otherwise, a claim is allowable to the extent it is enforceable under applicable non-bankruptcy law. Because Section 506 does not apply to Protected PMSI Lenders, the claims held by those creditors must be treated under Section 502. Applicable non-bankruptcy law permits enforcement of a deficiency claim. Not so fast On the next business day, the Quick court held that return of property to a Protected PMSI Lender constitutes full compliance with a debtor’s obligation for treatment of the Protected PMSI Lender’s claim in a Chapter 13 plan. There is no surviving unsecured deficiency claim. In reaching this conclusion, the Quick court engaged in a statutory construction analysis, finding that the text of the hanging paragraph is not ambiguous. The text can be applied literally, without reaching a result which is “demonstrably at odds with the apparent intention of its drafters.” The court reasoned if Section 506(a) does not apply to Section 1325(a)(5) there is no permissible bifurcation of the Protected PMSI Lender’s claim into secured and unsecured components. Therefore, relying principally upon In re, Durham 361 B.R. 206, 209 (Bankr. D. Utah 2006), the court held that no unsecured deficiency claim may be asserted in the Chapter 13 case by the Protected PMSI Lender. In Quick, the Protected PMSI Lender raised a constitutional argument under the taking provisions of the Fifth Amendment to the U.S. Constitution. Simply put, the lender claimed that the elimination of its right to a deficiency claim is unconstitutional. The court rejected that argument on the basis that bankruptcy laws may permissibly impair contractual obligations provided that the creditor receives just compensation for its property interest. The return of the collateral satisfies the constitutional requirement. Quick acknowledged the existence of the Wright decision, issued on the prior business day, only in a footnote, without making any attempt to directly address the rationale utilized by the Wright court. Presumably, once the Quick determined that the hanging paragraph is not ambiguous, the court felt no need to address the merits of the rationale adopted by the Seventh Circuit in Wright. Conclusion I assume both the consumer bankruptcy bar and the consumer finance bar are now beginning to draft the briefs to be submitted in the next case (perhaps Quick) to reach a court of appeals. The lenders are looking to avoid a petition for cert; the consumer bar has to lay the groundwork for a petition for cert. Interesting how so much of the bankruptcy jurisprudence in the Supreme Court arises in consumer bankruptcy cases. Abraham E Brustein Phone: 847-698-9600 NCBJ Sponsorship opportunitiesThe Commercial Law League of America and its bankruptcy section have sponsorship opportunities available at the National Conference of Bankruptcy Judges:
Copyright © 2007 Commercial Law League Bankruptcy Section Except as otherwise provided, the CLLA Bankruptcy Section newsletter permits any individual or organization to photocopy any article, comment, note, or other piece in this publication, provided that: (1) copies are distributed at or below cost; (2) the author and the CLLA Bankruptcy Section seal are prominently identified on the first page; (3) proper notice of copyright is affixed to each copy; and (4) all other applicable laws and regulations are followed. The CLLA Bankruptcy Section reserves all other rights. |
A Pulitzer prize-winning commentator whose laugh-out-loud humor has resulted in several books, Dave Barry is an equal opportunity mocker. On subjects ranging from politics to parenting to money matters, he expertly highlights the irony and absurdity in everyday life. In our interview, Barry talks about his early days as a columnist, what it's like to win the Pulitzer, and how he's honed his humor over time.